The value of economic scenarios from a risk perspective
Behavioral Economic Scenario Stress Testing Jos Berkemeijer, Managing Partner Symetrics April 2, 2015
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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SymetricsŠ2015
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Agenda 1. What is risk?
2. The new economic reality 3. Models
4. Looking forward? 5. BEST: Behavioral Economic Stress Testing
6. Key questions 7. Finally
April 2, 2015
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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SymetricsŠ2015
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What is risk? Estimating risks‌.. How many bubbles are in a bottle of Champagne?
? April 2, 2015
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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What is risk? Markowitz approach
Risk = σ X~ April 2, 2015
2 N(μ,σ )
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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What is risk? Spread = Risk?
April 2, 2015
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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SymetricsŠ2015
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What is risk? Taleb’s risk definition What company is most risky to invest in? 6 5 4 3 2
Nassim Nicholas Taleb
Black Swans Antifragile
1 0 1
2
3
4
5
Stock price A April 2, 2015
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Stock price B
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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The new economic reality: low interest rates
April 2, 2015
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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The new economic reality: Real rate
April 2, 2015
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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SymetricsŠ2015
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Models: Linear thinking • • • • •
Input = Output The future is a linear extrapolation of the past ‘Mean reversion’ ‘Herding’ The best estimate for tomorrow is today
Think Different April 2, 2015
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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Symetrics©2015
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Models: Evaluation by Guus Boender (†) • We have the bad luck that this crisis since 2009 fell outside the range of thousand
• A model cannot take into account things that have not yet happened • Non-normal distributions occur more frequently • The probability tail is thicker • We need more data • Never consider models as absolute truth Source: De Actuaris : Uitspraken Guus Boender (1955 – 2014) April 2, 2015
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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Looking forward? Predictions fail
Dutch pension fund feasibility test = Looking April 2, 2015
60 years ahead‌.
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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Looking forward? Informed decision making
1 • Predictions • ‘Beliefs’
2 April 2, 2015
• • • •
Understanding Risks ‘Informed Decision Making’ ‘In Control’ ‘Countervailing Power’
N(μ,σ2)
NL(μ,σ2,B,T)
• Stochastic • ‘At Random’
• ‘Behavioral Rules’ • ‘Tail Risks’
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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Symetrics©2015
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BEST: Behavioral Economic Stress Testing 1. Oude modellen - Asset Classes - Scenarios defined by experts
+
= Beliefs
2. BEST Model - Asset Classes - Economic Data
+
Scientific Behavioral Algorithms 1. Banks 2. Consumers 3. Markets
= A. More expressive power B. Better understanding C. In Control
BEST consequences: April 2, 2015
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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SymetricsŠ2015
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BEST: Examples of Economic Scenarios 1. Central Scenario 2. Recovery 3. Muddle Through
4. Stagflation 5. QE US Edition 6. QE ECB Edition 7. Nominal GDP Targeting 8. Credit Crisis 9. China stops buying US bonds 10.Yen Depreciation April 2, 2015
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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BEST: Stresstesting
Behavioral Rules
Regulatory stress testing Much testing‌.., little stress? April 2, 2015
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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BEST: EIOPA Pension fund stress test 2015
EIOPA Pension fund stress test • EU-wide stress test among pension funds • Establish test criteria
• selection NL pension funds, by Dutch regulator (DNB)
• Macroeconomic stress scenarios
With or without ‘Behavioral? April 2, 2015
Gabriel Bernardino. Chairman EIOPA
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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BEST: Stagflation 2015, Example Risk-Return Development 2011-2015 Average Dutch Pension Fund Scenario: Stagflation
Period 2011-2015 Efficient Frontier 2011 – 2014 Average return 2011 – 2014
Average Return
Period 2011-2015 –
Stagflation without Behavioral rules Stagflation with Behavioral rules Sharpe Sortino Minimum Change
Risk
April 2, 2015
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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BEST: Scenarios & Optimalisation
1. Capital requirements 2. Minimal capital requirement 3. Funding ratio
Risk Appetite Check April 2, 2015
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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BEST: Is your pension fund ‘Economic Proof’? Stresstesting Risk Appetite Short term
Long term
0 year
15 year
60 year
Required Capital Check
ALM Study
Feasibility Test
Critical Values I
Critical Values II
Critical Values III
Strategic Asset Mix
Behavioral Economic Stress Test
Bad weather scenarios April 2, 2015
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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BEST: Dynamic Investment Policy
tijd
BEST Informed Decision Making • Step by step to a dynamic investment policy: Economic Trigger Points • From ‘Damage Control’ to ‘preventive & timely adjustments’ : Economic Alert Indicators • Scenario reporting on a quarterly basis: Aside from Benchmarking, also Scenario-updates April 2, 2015
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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Key Questions 1. 2. 3. 4.
Best of Class? Demonstrably ‘In Control’? Informed Decision Making? Countervailing Power?
What are your planned actions? 1.
feasibility test 2015
2.
ALM 2015
3.
Stress test 2015?
4.
‘Holistic Balance Sheet’
5.
Dynamic Investment Policy?
April 2, 2015
BEST or NOT SO BEST ?
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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Finally Why stress test the old way, if you can do it the BEST way?
April 2, 2015
Pension conference The Netherlands - Presentation by Jos Berkemeijer
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Contact Symetrics
Contact information Corporate Office
Branch Office
Contact information
Symetrics B.V. Het Rietveld 55a 7321 CT Apeldoorn The Netherlands Tel. +31 55 201 8829 W: http://www.symetrics.eu/
Symetrics B.V. De Corridor 5 C 3621 ZA Breukelen The Netherlands Tel. +31 34 671 5065 W: http://www.symetrics.eu/
Martijn van Eck, Managing Partner Tel. +31 6 525 68 775 vaneck@symetrics.eu
London, United Kingdom
Symetrics is a member of London FinTech Incubator Level39 W: http://www.level39.co.uk/members
April 2, 2015
Jos Berkemeijer, Managing Partner Tel. +31 6 46 12 0660 berkemeijer@symetrics.eu Mrs. Anneke Stolk, Corporate Secretary Tel. +31 34 671 5065 stolk@symetrics.eu
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